BHP chief to shed light on mining-spinoff plan

RhiannonHoyle

BHP Billiton Ltd.'s diversification across commodities from aluminum to oil earned it darling status in an industry where many of its rivals were shackled to the fortunes of a single commodity. This week, though, investors expect CEO Andrew Mackenzie to shed more light on his proposal to tack away from that strategy as BHP completes plans for one of the largest spinoffs in mining history.

The release of BHP's fiscal first-half earnings after the U.S. market closes on Monday will also highlight the challenges facing the Anglo-Australian miner as it carves off better-performing assets such as nickel pits to focus on four commodities including iron ore and oil, the prices of which halved in value last year.

As the slide in some resources markets deepens, investors and analysts have questioned whether the timing is right any longer for a roughly $15 billion demerger that would leave BHP with four units, all of which are forecast to report an on-year decline in first-half earnings.

The miner had long championed the benefits of digging up a variety of commodities, as they often don't rise and fall in tandem. "The diversification of our portfolio of commodities, geographies and currencies is a key strategy for reducing volatility," the miner repeated in recent annual reports.

Now, BHP will have to defend its rationale for a planned demerger that will leave it with fewer commodities, lower cash flow, and likely higher net debt, according to J.P. Morgan analyst Lyndon Fagan.

The half year through December was already a challenging one. While BHP produced more iron ore, coal and petroleum, prices of those commodities tumbled.

Demand has been outpaced by a supply surge from mines planned when prices were booming. New production has come at a time when China's economy is slowing and concerns about global growth are rattling confidence.

J.P. Morgan forecasts first-half earnings from iron ore before interest and taxes have fallen 41% from a year earlier. It projects a 16% drop in copper earnings and an 11% drop in earnings from its petroleum and potash division over the same period. In coal, the so-called fourth pillar of what will be the new BHP, the bank tips a swing to a loss.

The miner, based in Melbourne, Australia, is expected to report a shriveled half-year net profit of $3.59 billion. That is the median consensus of six analysts' forecasts and compares to a $8.11 billion profit a year earlier.

In addition to lower prices, the result will be weighed by impairment charges. BHP last month flagged write-downs of up to $250 million on its petroleum business and as much as $350 million more after failing to sell its Australian nickel assets.

As BHP faces continued headwinds, many brokers have shifted their preference to rival Anglo-Australian miner Rio Tinto PLC. That company has wooed investors with a beefed-up dividend and recently announced a $2 billion share buyback. Few analysts expect BHP to start buying its own shares because of its uncertain outlook.

To be sure, Rio Tinto has been accused of an overreliance on iron ore. But it is the world's most profitable major producer of the steelmaking ingredient, and it has signaled a shift to a more broadly diversified miner with planned investments in everything from bauxite to copper. Rio Tinto also has an aluminum business that is starting to become more profitable after several troubled years featuring billions of dollars in write-downs.

BHP's Australian shares have pulled 10% lower since mid-2014. Over the same time, Rio Tinto's have gained 7.5%.

It is a change of pace from previous years. In the five years through 2010, BHP's shares gained 99% compared with Rio Tinto's 57%.

BHP's Mr. Mackenzie has previously argued the demerger will be the catalyst for better investor returns, saying the spinoff will help it simplify the business and cut costs. Commodities are also a cyclical business and the units it keeps are likely to benefit from an upswing at some point.

It intends to release all shareholder documentation next month and have the demerger completed before the end of June.

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